Silver Goes Up, Down and All Around!

Well… Yesterday’s price action was something…really something… The currencies backed off their assault on the dollar for a day, but the slippage was minimal… The real rodeo for the prices was in gold and silver, with silver riding the bull till the horn sounded! As I mentioned yesterday, silver had traded to $49, which represented a $9 rally in less than two weeks. Well, it was as if silver stepped on the trap door and it sprung, with silver falling $3, then gaining it back, only to see it lose $2 on the day… Up, down, all around…

Silver has lost another $1 overnight, and gold has lost $2… This is interesting trading, because the dollar is on the tenterhooks once again with the currencies. The Dollar Index has reached a 3-year low this morning, as it touched 73.75.

The markets return today, for the most part, and it looks like they want to take the dollar lower… There is HUGE event risk tomorrow, when the FOMC meets, and then following the meeting, where the Fed Heads will leave rates at near zero, Fed Chairman, Big Ben Bernanke is going to go before reporters and field their questions… Brother! I surely wish I were there as a reporter to ask him a few questions! But, I guess I’ll have to see if the financial reporters have any intestinal fortitude. I question whether they do or not, because their political reporting brothers sure did!

But that’s tomorrow… I’ll be deep into Central America, and probably not able to even see or hear what Big Ben has to say! Today, we’ll see the color of the February S&P/CaseShiller Home Price Index, which is expected to continue its slide down the slippery slope. Consumer confidence prints today too, and for some unknown reason, consumer confidence is forecast to have increased this month…

Nevertheless, I’m here today, and from what I see in the currencies right now, they are starting and stopping, starting and stopping… That’s because of the two thoughts in the markets… The first thought is to sell the dollar, because the Fed will continue to keep rates low, and stimulate the economy even after QE2 ends… And the second thought, is that the economy is strong enough to stand on its own two feet, and doesn’t need stimulus, and those people are buying dollars…

But that’s a good thing, for a while at least, to have a good two-way market… But that will all change later this year… For I truly feel that later this year is when the Fed will come back to the quantitative easing table… And Big Ben’s claim that inflation pressures are only “transitory” will come back to haunt him!

Alrighty then… In our ever-continuing attempt to tell you what the Chinese are doing… Yesterday, I told you that Chinese officials were calling for a reduction of $2 trillion dollars from their $3 trillion dollars in reserve. I talked about what they could spend their $2 trillion dollars on… And one thing I failed to mention was they could fund the branch of their sovereign wealth fund that invests in higher-yielding assets… China announced yesterday that they would fund an additional amount up to $200 billion very soon…

And… If you don’t think $200 billion can move a market… In 2005, about $350 billion in dollar repatriation caused a dollar rally that lasted 9 months… So… $200 billion could go a long way toward pushing the dollar even lower.

OK… Not getting what this is all about? Ahhh grasshopper, when I read that story, I immediately thought about the Chinese looking for higher yields… Soon, they will want the majority of their investments in higher yielding assets; it’s that simple… Oh, and by the way, those high yields cannot be found here in the US. What will the US Treasury do if China decides to play Ferris Buehler at a future auction?

Yesterday, a friend of mine (thanks Brad!), sent me a story that talked about how China’s economy would surpass that of the US by 2016 (that’s five years from now)… The report came from the IMF (International Monetary Fund), which figures that by 2016, the Chinese economy will be $19 trillion, and the US will be $18.8 trillion… Just 10 years ago, the US economy was three times the size of China’s, folks…

And then I saw this and just had to include it in the Pfennig… OK… Let me set this up… Long time readers know that I truly feel that the gold and silver markets are manipulated… The GATA people have made it their quest to prove that this manipulation occurs, and to bring the perpetrators to justice… Well, you can now count one more prominent voice behind the thought that gold is manipulated.

The man with the most respect than any other financial newsletter writer, Richard Russell, has now joined the ranks of those who “believe”… Here’s the great Richard Russell from last Thursday…

The desperate battle to keep gold below 1500 continues. I watched the erratic action of gold near yesterday’s close. I’m fascinated to see whether June gold can close above 1500 or whether the anti-gold contingent can manage to knock gold down (again) below 1500. The action is now so blatant that it literally screams of manipulation. At its high yesterday, June gold sold at 1506.50. At yesterday’s close, June gold was trading at 1498.10. It’s almost embarrassing to watch the action. What we’re seeing is the anti-gold crowd and the manipulators vs. the great primary trend of gold.

The battle about gold closing above 1500 is that once above 1500, technically gold will be on its way to 2,000. And from there 5,000 will be the target…from the anti-gold crowd’s standpoint, gold must be held (on a closing basis) below 1500.

When you think about it, it’s no wonder that Wall Street and the Fed hate gold. Gold exists outside the system. The Fed can’t manipulate or create gold the way they do Federal Reserve Notes. When gold rises, as it has been doing, it hoists a red flag over Wall Street, the Fed, and the economy… All the lies, corruption, and secrets of the Fed and the politicians can’t erase the dire message of gold.

Then there was this… OK… This is going to be tricky to explain, but I’ll do my best… Currencies can either trade as free-floating, fixed or pegged, or as a Non-Deliverable Forward (NDF)… When currencies are free floating, the currency will pay you for the difference between the two countries’ interest rates… For example, if you’re selling US dollars, and buying Aussie dollars (AUD), the difference between the two countries’ rates is about 3%. And one can expect to get paid near that amount for holding the currency… However, in an NDF, it’s not about rate differentials… It’s about speculation… When the markets believe that an NDF currency, for example the Brazilian real (BRL), is going to rally, they will make it more expensive to buy it, and take away the interest…

So… Why am I going through this? Well… For years, the speculators have taken away the interest that “could be paid” in China, so getting interest on renminbi (CNY) is near impossible. Now, the speculators have gone after the Brazilian real… In Brazil, the internal interest rate is around 12%, but when the speculators take away interest, our deposits in Brazilian real CDs gets reduced…

Hope that’s clear… (Probably like mud, but I did my best!)

To recap… The currencies range traded yesterday, with some slippage, but have rallied back this morning, as most markets are back to work. The real price action came in silver yesterday, where we saw some major ground made, given up, made back, and then given up! China announced that they were going to fund their Sovereign Wealth Fund that buys higher yielding assets with up to $200 billion. And long time Gold Bug, Richard Russell, is now on board with the gold manipulation bandwagon…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning